Charging Users Would Rescue Air Traffic Control

Los Angeles (May 4, 2005) — The nation's air traffic control system is short $8 billion in the near term, and as much as $25 billion longer-term. As a result, desperately needed modernization efforts to double air traffic capacity may be put on hold. To ensure the overburdened system can meet growing capacity needs and fund technological improvements, air traffic control, currently funded by a declining tax base, should be shifted to a system that directly charges users, i.e. aircraft owners, according to a new Reason Foundation study.

The plunge in air fares, thanks to competition from low-cost carriers like JetBlue and Southwest, has caused a sharp decline in the ticket tax revenues that currently fund the strained air traffic control system. The Reason Foundation study demonstrates why these decreases are likely to continue and recommends making the Federal Aviation Administration's Air Traffic Organization (ATO) a self-supporting agency that charges aviation users for its services. The shift would remove the uncertainty and fiscal constraints of the present system, in which air traffic control is part of the federal budget process. It would provide a predictable revenue stream that keeps pace with aviation growth, enabling revenue bonds to be issued to pay for the new technology needed to double the system's capacity.

"In one way or another, FAA must be given the ability to do integrated capital and expense budgeting if it is to support additional capacity while lowering costs and improving service. Current procedures, which hold the agency hostage to the annual governmental budgeting and appropriating processes, do not work and never will work," stated Robert L. Crandall, the retired chairman of AMR and American Airlines who supports the Reason plan. "To get the improved results we all want, both the Administration and Congress must recognize that the FAA is a very big, very complex business, which must have the ability to lay out multi-year capital and operating plans which reinforce one another and can be implemented without political interference."

"The Air Traffic Organization needs to be taken out of the federal budget process and users who pay should have say in what is spent and how it is spent," said Vaughn Cordle, CEO of AirlinesForecast and co-author of the Reason study. "Right now the FAA's customer is not the users who pay the costs of the air traffic control system, but the congressional committees that hold and relish political power. Politics trumps potential market-responsive efficiency and the tax payer and users of the system pay significantly more than they should."

"Congress created the Air Traffic Organization and wants it to operate like a business," said study co-author Robert Poole, director of transportation at Reason. "But they failed to give it two necessary tools: a board of directors representing its customers and its own bondable revenue source." Both the board and air traffic user fees were recommended by a 1997 commission that proposed creation of the ATO. It was headed by former Congressman Norman Y. Mineta, now the secretary of transportation. "The Mineta Commission got it right eight years ago," Poole said. "But Congress needs to implement the rest of what it recommended."

The Reason study explains several benefits of a user-funded air traffic control system, drawing on the Mineta Commission's report, including:

A self-sufficient air traffic operation with funding levels driven by the needs of customers and actual levels of aviation activity, instead of whatever the federal budget process can eke out each year;

A reliable revenue stream, against which long-term bonds for much-needed modernization could be issued;

Investments in modernization that would actually benefit the users, improving the system's productivity;

Economic incentives for owners to equip their planes with new technologies, improving efficiency;

More equitable distribution of costs among users;

A customer-focused corporate culture that gives users what they want and need in terms of air traffic control services.

Why would airlines support a new system? A customer-focused system would be more likely to expand capacity and reduce unit costs than the present one that is accountable to congressional committees, instead of aviation customers. And the transition to the bond funding of modernization would save significant money during the first decade of transition. The Reason also study points out that the U.S. is the only major country that does not charge air traffic fees to the operators of aircraft and shows how 180 other countries determine their air traffic user fees.

Robert Poole is founder and director of transportation at the Reason Foundation. He has advised the last four presidential administrations on transportation issues and testified before the House and Senate aviation subcommittees on numerous occasions. Poole served on the Bush-Cheney transition team in 2000-01 and is a member of the Air Traffic Control Association and the Government Accountability Office's National Aviation Studies Advisory Panel.

Vaughn Cordle is the CEO and chief analyst of AirlineForecasts, LLC. He is an airline analyst and consultant to various hedge funds, government agencies, corporations, and consulting groups. He has over 25 years of experience in the airline industry and is a practicing CFA Charterholder and a senior B777 captain for a major airline. He holds an ATP rating in the LR-J, CE500, A320, B727, B737, B747-4, B757, B767 and B777 aircraft and holds 33 world and national speed records.

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